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Are Caterpillar's (NYSE:CAT) Profits Sustainable after Revenue Decline?


Monday, April 26th, 2010

Caterpillar (NYSE:CAT) surprised analysts as they exceeded profit expectations, but I'm surprised at the hype surrounding it as it has been touted as proof the economy has turned around.

What needs to be carefully looked at is the revenue of Caterpillar, which actually plunged by 11 percent, even while profits rose.

All this means is Caterpillar has cut operational costs and are getting more productivity out of their workers. The idea that this points to an economic turnaround can't even begin to be taken seriously, even though some segments of the company did do well.

Earnings did increase to 36 cents a share, a major improvement over the 19 cents a share loss last year in the same quarter.

More importantly (those improvements are meaningless because of the terrible economic conditions last year which guaranteed there would be a better quarter) the guidance of the company was upbeat, saying revenue and earnings should increase over the rest of the year.

They increased their revenue projections from $35.6 billion to $40.5 billion to $38 billion to $42 billion. Profits were upwardly adjusted from $2.50 to between $2.50 to $3.25 a share.

According to Caterpillar this comes from an increase in orders this year, describing them as "significantly higher" than last year. But then why is revenue so far down if orders are much higher? It could be they mean orders are higher for the months ahead, and they weren't talking about for the last quarter.

Leading the rebound for Caterpillar are orders from emerging nations, with China predominant among them. As China goes, so will go Caterpillar, and they are dependent upon them for growth.

Some of the particular products in growing demand are mining and construction equipment, especially bulldozers and excavators.

I'm a little suspicious of the guidance given by Caterpillar, as it seems a little too optimistic. We'll see over the next couple of quarters if that is the case or not.

But when you have revenue falling by over 11 percent and profits rising, it's not increased orders generating that, but cutting costs and getting more out of your employees.

Taking that reality as a basis for saying we're in an increasingly strong economic recovery doesn't really make sense at all, and we'll see in several months whether this is all hype with little foundation to back it up. The numbers don't justify the optimism, so either there really is an enormous order backlog, or Caterpillar and economic writers are just taking things and running far beyond what is justified for them to do.



Article by Gary B

The views expressed are the subjective opinion of the article's author and not of FinancialAdvisory.com



Tags: caterpillar , earnings , quarterly report , revenue

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